How can America serve better the millions of citizens outside the financial mainstream?

TWO years ago Sabina sold flowers on the street from a shopping trolley. Today she has her own storefront in Queens, thanks to a $1,500 loan from Grameen America, a microfinance institution based on Grameen bank, which was founded by Muhammad Yunus in Bangladesh. Since opening its first American branch in January 2008, Grameen has found fertile ground. It has lent more than $25m to 7,300 borrowers. At 15%, interest rates are high, but far less than a loan shark or payday lender would charge (the annualised interest on a payday loan is typically 400%, sometimes twice that), and there are no other fees or collateral required. Grameen America's repayment rate is around 99%. It now has branches in four of New York's five boroughs, and plans to open in Washington, DC, North Carolina and California. It also has one in Omaha and Indianapolis.

Also expanding in California is Self-Help, a North Carolina-based institution that develops property for affordable housing and small businesses, makes mortgage loans to low-income and low-wealth customers and operates a network of credit unions. Its mission is to help poor people buy houses; its founder, Martin Eakes, believes that “most families enter the middle class by becoming homeowners”. A similar institution in Massachusetts, Boston Community Capital (BCC), aims not to get poor Bostonians into homes but to keep them there: BCC buys foreclosed houses from banks and resells them to the original owners with 30-year, fixed-rate mortgages. In the past two years BCC has prevented 135 Massachusetts homeowners from being evicted, and dramatically cut their monthly payments.

But it is not just homeowners in dire straits who need better financial services. A report by the Federal Deposit Insurance Corporation (FDIC) in 2009 found that more than a quarter of American households are “unbanked” or “underbanked”—meaning they either have no bank accounts, or have accounts but still use non-bank services. And as the number of poor Americans has grown, that number may have increased.

Small wonder that non-bank services are booming. Each year Americans buy $75 billion in money orders from outlets other than banks or post offices, and cheque-cashers convert some $60 billion. Revenues from pre-paid cards, remittances, money orders, cheque cashing and payday lending were $338 billion in 2010 and may well rise to $520 billion by 2015. Big-box retailers are getting in on the act, too: K-Mart, Best Buy and Walmart all offer bill-paying stations to their unbanked customers. Walmart also offers reloadable pre-paid credit cards and cheque-cashing, which costs $3 for a cheque up to $1,000 and $6 for cheques between $1,000 and $5,000.

That is a lot less than the standard 1-3% that high-street cheque-cashers charge, though it remains a fee that customers with bank accounts can avoid. But banking is not cost-free. Fees for debit cards, account maintenance, below-minimum account fees and overdrafts—which rose by 11% between 2000 and 2007—add up, particularly for modest accounts. Small wonder that the most common reason given by unbanked households for not having an account was not having enough money to feel they needed one (see chart).

But just because mainstream banking seems inhospitable to the poor does not mean it has to be. In 2006 San Francisco's then-mayor and treasurer, Gavin Newsom and José Cisneros, launched a programme called Bank On San Francisco, which tried to get unbanked San Franciscans—then around 20% of the city's population, and half of the city's black and Latino adults—to open accounts. Fifteen banks and credit unions agreed to provide low- or no-cost accounts without minimum-balance requirements, to offer “second chance” accounts to customers with shoddy banking records and to advertise and offer financial-management training in poor neighbourhoods.

Participating banks also agreed to accept Mexican and Guatemalan consular IDs from prospective customers, which drew in the city's Latino population. A 2006 Kansas City Fed study found that 53% of Mexican immigrants lacked bank accounts. Getting such people into the banking system not only keeps their wages secure; it also reduces crime. Unbanked immigrants make good marks: they carry a lot of cash, especially after payday, and if they are undocumented they may be reluctant to go to the police.

A study in North Carolina found that in counties with branches of the Latino Community Credit Union (LCCU)—one of America's fastest growing credit unions, which serves North Carolina's growing Latino community—robberies fell steadily. The year after an LCCU branch opened in Charlotte, armed robberies against Latinos fell by 22.6%. Since Bank On San Francisco's launch an estimated 71,000 starter bank accounts have been opened. The model is being copied in more than 70 cities and states nationally, and in 2010 the Obama administration proposed a national Bank On USA programme.

Another programme from San Francisco starts savers early: Kindergarten to College (K2C) gives kindergarten children in the city a savings account with $50. Parents and pupils can—and through matching funds are encouraged to—add to the account. The money can be used only for education after graduation from high school. Studies have shown that pupils with savings accounts—regardless of the amount in them—are several times more likely to attend college than those without.

Another promising scheme links deposits to prizes: a programme in Michigan in 2009 gave credit-union members a chance to win raffle prizes for every $25 deposited. Prize-linked savings programmes have been successful in Germany, Brazil and India, among other places, but in America, where states tend to ban private lotteries and banks (but not necessarily credit unions) and are not allowed to run lotteries, winning widespread political approval may prove harder to get.

However, the rewards of savings and carefully tended investments can be more modest and tangible. Having moved from shopping trolley to shop-front, Sabina has built a website advertising her flower-arranging and bought a refrigerator to keep the flowers fresh. She hopes to buy a delivery van next year and eventually to open another shop in the suburbs. Sometimes macrodreams start with microloans.